July 27, 2013

An amendment to the Energy Bill will make it easier for independent generators of renewable electricity to sell their power to suppliers, the Government has announced.

It will assist in dealing with industry concerns that the removal of the 'supply obligation' in the Renewables Obligation (RO) will undermine the market for power purchase agreements (PPAs)

If approved, the amendment would enable the Government to establish a scheme obliging energy suppliers to buy electricity from renewable generators under specified conditions if they were unable to agree their own commercial terms. This power would be used as a last resort, to provide greater certainty to independent generators and investors. Detailed plans for the scheme will be developed and consulted on later this year, the Government said.

Energy Minister Greg Barker said that the reforms would "create the framework for a far more dynamic and entrepreneurial market, while still ensuring that we get the large scale investment that industry needs".

"Opening up the electricity market to more competition is a fundamental part of the reforms we are introducing through the Energy Bill," he said. "It will also allow new smaller players to gain a greater share of the exciting renewable energy market."

Independent electricity generators typically rely on long-term PPAs in order to secure the finance they need to invest in generation technologies. A PPA allows the generator to offset some of the risks of the project onto a counterparty, who will in exchange be able to take advantage of a cheaper guaranteed price for electricity.

However, developers have expressed concern that Contracts for Difference (CfDs), the new financial support mechanism set out in the Energy Bill for low carbon energy projects, will affect their ability to secure PPAs. The scheme, which will replace existing support mechanisms such as the Renewables Obligation (RO), will not carry the same obligation for energy suppliers to source a certain amount of the energy they supply from renewables.

"Independent generators often rely on PPAs to provide a secure route for the offtake of their electricity, but there is concern that the removal of the supply obligation will undermine the market for PPAs, and could result in generators struggling to agree decent commercial terms for the electricity they generate," said environment and energy law expert Fiona Ross of Pinsent Masons, the law firm behind Out-Law.com. "This in turn could impact on their ability to obtain finance, as funders look for secure long term offtake arrangements to provide confidence of a clear route to market."

Although providers of PPAs have "maintained that the market will react to the change". Ross said that the Government was clearly concerned enough to have considered the impact of its new policy on the offtake market. Part of that work has included developing standard PPAs for CfD projects to reduce legal costs in negotiating contracts, as well as the development of a voluntary code of practice to help developers understand what to expect from potential purchasers of their electricity, she said.

"This most recent announcement goes much further, signalling a willingness to introduce an offtake of last resort in certain circumstances where a commercial agreement has not been possible," Ross said. "The precise mechanism is to be developed and consulted on later this year, and the Government has indicated that extensive stakeholder engagement will form an important part of this process. Developers, funders and PPA providers will therefore want to make sure their voices are heard."

The proposals are intended to benefit generators that are not vertically integrated through the supply chain, meaning those that do not have a significant supply arm through which they sell their electricity directly to consumers. This can cover a range of generation technologies and sizes of company. According to the Government, independent generators account for a significant proportion of the new energy infrastructure projects currently awaiting final investment decisions.